Canadian M&A Perspectives Private and Public Mergers & Acquisitions | Private Equity

Advance Notice By-Laws & Defending Against a Surprise Attack

Posted in Public M&A, Shareholders, Strategy
David RandellGraeme Norwood

Shareholders typically have three options available to them when looking to nominate directors different than those put forth by the company’s management, (i) a shareholder proposal that is added to the management proxy circular for the applicable shareholder meeting, (ii) the more popular and publicized proxy contest, which generally requires that the shareholder(s) soliciting proxies prepare and mail to shareholders a dissident proxy circular that both identifies the nominees in question and contains certain prescribed disclosure, and (iii) nominating directors from the floor at the company’s annual general meeting (either as a registered shareholder(s) or by way of proxies), usually providing the company with no or very little advance warning.

In August of 2011 our colleague, Matthew Cumming, wrote a blog entry entitled “Dissident Ambush of a Shareholder’s Meeting” which discussed option (iii) and the tactics to consider in taking such an approach. As shareholders of Canadian companies have become increasingly active, this type of behavior has become more common. In response, boards have found a way to defend against being subject to such an unwanted surprise and one that appears to be garnering support – advance notice by-laws.

The typical response when it becomes apparent that the company’s shareholders will face a surprise vote on the election of directors has been to postpone the scheduled shareholder meeting. Canadian courts have proven sympathetic to such a response provided the board of directors, in postponing the meeting, does so in good faith. In allowing the postponement of such meetings, the courts have pointed to the importance of enabling all shareholders to meaningfully participate in the voting process for the election of directors as doing so is good corporate governance.

Despite having jurisprudence on their side, rather than wait to be surprised, boards of companies in Canada have started taking proactive steps to defend against this sort of shareholder behaviour by adopting an “advance notice” by-law. Broadly, the result of adopting such a by-law is that the company’s shareholders are precluded from nominating directors at a meeting of shareholders unless the company receives advance notice of the nomination within a prescribed time period, usually not less than 30 days and not more than 65 days prior to the scheduled meeting, as well as certain particulars regarding the proposed nominees.

Advance notice by-laws have long been a tool of corporate governance in the United States (having been adopted by the likes of JPMorgan Chase and Citigroup), but are gaining popularity north of the 49th. Just recently, Institutional Shareholder’s Services Inc. (“ISS”) released its Canadian Corporate Governance Policy 2013 Updates, which, for the first time, included consideration of advance notice requirements. ISS stated that it would evaluate each proposed advance notice by-law on a case-by-case basis but would likely support advance notice requirements which “provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice, regulatory, and shareholder review”. Specifically, ISS recommends a deadline for notice of a shareholders’ director nomination between 30 and 65 days prior to the meeting date. ISS is not alone in its views as Glass Lewis & Co. (“Glass Lewis”) released its Proxy Paper Guidelines for the 2013 Proxy Season and has also indicated it would generally support these advance notice policies (effectively the same as a by-law).

In addition to the support of proxy voting firms, advance notice policies have recently found support in the courts. In Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090 (CanLII), the court was asked by a shareholder to declare an advance notice policy unenforceable. The court found in favour of Mundoro’s board and went on to state that the policy in question ensured an orderly nomination process and that the company’s shareholders should be fully informed in advance of an annual general meeting.

To date only a handful of small and mid-cap companies in Canada have adopted advance notice by-laws but it’s time for Canadian corporations of all sizes to consider whether following suit makes sense. With AGM season right around the corner, directors may have an opportunity to adopt such a by-law and ask their shareholders to ratify it at the upcoming annual general meeting. We would recommend consulting with counsel before taking any action.

No-one likes to be surprised – and more than ever there is a path to preventing such an unwanted event from occurring.